But beyond the sign up bonus, what exactly is Betterment and how does it work? Here are my thoughts after opening my account last spring.

Betterment Review

Betterment makes it easy with only two portfolio components: stocks and bonds. You pick your asset allocation and Betterment manages the rest, using index exchange traded funds (ETFs).

Betterment believes in indexing as one of their principles instead of using actively managed funds to try to beat the market. That aligns with my investment philosophy so I like what they’re working on here.

They select the ETFs for you and maintain diversification and your selected asset allocation. They pick the ETFs focused on low fees and high liquidity to keep the expenses down.

Here are the account details:

• Account Minimum: None
• Account Transaction Fees: None

Betterment Portfolio

Here’s what’s in the Betterment portfolio right now (they review it quarterly):

Betterment Stock Market Portfolio:

• 25% VTI: Vanguard Total Stock Market
• 25% IVE: iShares S&P 500 Value Index
• 25% VEA: Vanguard Europe Pacific
• 10% VWO: Vanguard Emerging Markets
• 8% IWS: iShares Russell Midcap Value Index
• 7% IWN: iShares Russell 2000 Value Index

I’m pleased that they recently just added international holdings, as I thought the portfolio was lacking that dimension when I first signed up. Now the portfolio holds 35% in international (25% Europe Pacific and 10% Emerging Markets).

Betterment Bonds Portfolio:

• 50% TIP: iShares Barclays TIPS Bond Fund
• 50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The overall portfolio is designed to replicate the total market with a value and small cap tilt, which mirrors much of my target asset allocation.

Management Fees

Management Fees: The Betterment management fee is 0.3% to 0.9% of your average balance based on the following tiers:

The Betterment fee, which is charged quarterly, is on top of the expense rations for the ETFs (averaging less than 0.2%). If you withdraw your money, they’ll prorate the fee.

Obviously, 1.1% (0.9% + 0.2%) is a too high for my taste, since I like to keep our expense ratios very low (The last time I checked we were at a 0.148% overall expense ratio). But I also like to manage all of my own investments, so I would say I’m not their target customer.

However, if you’re not into selecting and managing your own portfolio, Betterment is trying to offer an interesting concept. Essentially you pay Betterment to make your trades, rebalance, and monitor the market for new and better ETFs for your portfolio.

Betterment Details

Rebalancing. Betterment automatically rebalances your portfolio every quarter, or when you portfolio is more than 5% from the target allocation.

Partial Shares. Some of the things I like are the ability to invest without the need to buy whole shares. In addition, Betterment uses automatic dividend reinvestment.

Taxes. Betterment will send 1099s (a 1099-B and 1099-DIV) at the end of the year. You’ll owe capital gains when you sell, and taxes on the dividends. Also, you need to be aware that any rebalancing that Betterment does on your behalf to maintain your target asset allocation will create a taxable gain or loss.

Fast Application. The application is fast. I timed it. 4 minutes. And I got my $25 bonus as soon as I verified my bank account, which always creates a good first impression!

Referrals. They have a referral program. When you refer your friends, you get $10 and your friend gets $25.

Betterment Concerns

Transactional Data. The activity data is a bit strange. They update “market changes” on a varying schedule. I understand the use of the baskets is probably driving it, but it’s very strange for those of us who like to track transactions in quicken. In addition, you can’t download your transaction history into a usable format right now, but it says that feature is in the works. I hope so, because frankly, a PDF transaction statement hurts my brain. Once the transactional data is improved, I think it will be more intuitive.

Peer Allocation. Betterment has a fun toy in the dashboard, comparing my asset allocation with my peers based on demographics. I’m at 88/12, but my peers are at 64/36. I found that a little unusual. In fact, when you look at males instead of females, it jumps up to 76/24. Ladies?

However, my bigger concern is that while the peer allocation is fun, it also implies that you should consider an asset allocation like your peers. I don’t agree with that. For example, just because the other women who are similar to me in age and income appear to be more conservative than I am, it doesn’t mean it’s correct.

Target Retirement Funds. While I like the idea for what Betterment is trying to accomplish, isn’t this very similar to target retirement funds? Specifically, much cheaper target retirement funds?

Betterment $25 Sign Up Bonus

Overall, let’s get back to the reason I tried out Betterment in the first place, to claim some free money! If you haven’t opened an account yet, it’s really easy to get the Betterment $25 sign up bonus, just open an account with $250.

What do you think of Betterment?

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© My Dollar Plan

Free Money week continues with the Sharebuilder bonus. In case you didn’t get the email from Sharebuilder about the bonus, here’s how it works:

How to Get $50 from Sharebuilder

1. Log in to your Sharebuilder account.
2. Navigate to the promo page: Accounts > Overview > Profile & Settings > Enter Promotion
3. Enter the promotion code: OLRCDP50
4. Make a $100 deposit every month from September through December.
5. Get your $50 account bonus before the end of January 2012.

Sharebuilder Terms and Conditions

• If you make a withdrawal from your account during this promotion timeframe (September – December), you won’t be eligible to receive the bonus.
• After entering the promotion code, verify that you get the following message: Your promotion code has been accepted. Congratulations!

More on Sharebuilder

Lower deposit option. You can also get a $25 account bonus with $50 deposits each month using the promo code: OLRCDP25.

Schedule Transfers. So that you don’t forget to make the transfers each month, you can sign up for automatic transfers each month.

Multiple accounts. I tried to enter the bonus code on both of my Sharebuilder accounts, but it only was accepted on one.

New Sharebuilder Account

If you don’t have a Sharebuilder account you can sign up for an account, and get a ShareBuilder $50 Sign Up Bonus.

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tradeMONSTER Review

If you’re looking to open a new brokerage account for either ETF or active trading, you may want to check out tradeMONSTER. They offer competitive rates, the latest online trading technology and a full suite of trading tools. Plus, help is available 24 hours a day.

tradeMONSTER Features

• Account Minimum: None
• Opening Account Minimum: $2,000
• Account Fees: None

tradeMONSTER Trading Fees

• Stocks & ETFs: $7.50/trade
• Bonds: $15.00/trade
• Options: $0.50/contract

tradeMONSTER Advantages

Online Investing Education for Traders of All Levels. Trade Monster recently ramped up their education center to offer articles, webinars and live events aimed at all levels of experience. You can register for some of the training even without a tradeMONSTER account!

Browser-Based Trading Tools. tradeMONSTER has a customizable trading platform for active traders and since it is browser based, you don’t have to download anything. Their Portfolio Analysis even lets you perform a “what-if” analysis to see a mathematical response to hypothetical future market moves!

tradeMONSTER Overall

tradeMonster seems to offer some great tools for an active trader and has competitive pricing. If you trade actively and are looking for a new broker, they are definitely one to consider. However, if you’re a casual trader with a small account, you may want to look for a company with no account opening minimums and rock-bottom stock trade prices.

Current tradeMONSTER Offers

tradeMONSTER will credit account transfer fees charged by your old broker for up to $250 when you’re a new customer who does a full account transfer for $3,000 or more.

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Their rock-bottom prices and low account minimums make them a great choice for the casual investor while their sophisticated platform will appeal to those with more complicated trading strategies.

OptionsHouse Review

OptionsHouse was founded by PEAK6 Investments, L.P., a large options-trading firm based in Chicago. Peak6 developed OptionsHouse to give average investors access to a sophisticated trading platform developed by those who trade options for a living.

OptionsHouse Account Features

• Account Minimum: None
• Opening Account Minimum: $1,000
• Account Fees: None

OptionsHouse Trading Fees:

• Stocks & ETFs: $3.95 per trade
• Options less than 10: 5 for $5, then $1/contract over 5; OR
• Options over 10: $8.50 +.15/contract
• Mutual funds: $9.95 per trade

OptionsHouse Advantages

Trading Tools. OptionsHouse trading tools include streaming charts and news, volatility charts, a probability calculator, and an options hotlist.

Customer Service. OptionsHouse’s customer service and trade desk staffers pride themselves on old-fashioned attention and support. They are available 7 a.m. to 6 p.m. CST except for when the market is closed and offer support via live chat, phone & e-mail.

OptionsHouse Overall

The OptionsHouse interface seems a bit more advanced than the average investor will require. However, their prices and minimums are very low so they are definitely a great choice if you are doing a bit of investing in individual stocks or ETFs.

OptionsHouse Current Offers

Referrals. OptionsHouse recently increased their referral program. It’s now a choice of $150 or 30 free trades for each person you refer.

Financial Times. OptionsHouse also gives you a free one year subscription to FT.com for new accounts funded with $5,000.

Dell Monitors. Until the end of the month, OptionsHouse is offering 3 different sizes of Dell monitors for opening & funding a new account. You can review all the requirements of the offer in Free 24″ – 30″ Dell Monitors from OptionsHouse.

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Betterment is offering a $25 sign up bonus for 5 minutes of your time.

How to Get Your Sign Up Bonus

1. Open a new Betterment account.
2. Make an initial deposit of at least $250 within 60 days of signup.
3. Get a $25 bonus.

Betterment Terms and Conditions

• The offer is valid only for new individual accounts with Betterment.
• To qualify for the bonus, you must make an initial deposit of $250 within 60 days of signup and not withdraw that initial deposit for 60 days.
• Offer available to U.S. Residents only.

More on Betterment

Betterment account details. Details of the Betterment investment account include:

• No minimum balance.
• No transaction fees or commissions.
• Betterment is a member of the Securities Investor Protection Corporation (SIPC), which means the securities in your account are protected up to $500,000.

What exactly is Betterment? Betterment is a personal investment account that will invest based on a stock/bond asset allocation you select when you sign up. Betterment uses ETFs to achieve the allocation and will make the trades for you.

How does Betterment make money? Betterment‘s fee is a straightforward 0.3% to 0.9% depending on your balance. If you open an account for the bonus with $250, the fee is 0.9% annually.

A note from Madison: I signed up to see if the 5 minute claim was right…. and they were, it only took me 4 minutes to sign up! In addition, my $25 bonus was credited immediately after I verified my bank account (even before the $250 transferred).

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Then I worked on adding phantom bond allocations to incorporate the net present value of our pension plans and analyzed the impact of including the same for possible social security benefits.

The next step is finding a way to account for something that has always troubled me – the exclusion of real estate in our portfolio. Our house, our rental properties, and now our cottage.

Until now, real estate has only ever showed up on our balance sheet, but never was included in our portfolio.

The Debate on Adding Real Estate to Asset Allocation

As the real estate we’re accumulating approaches the million dollar mark, every time I rebalance our portfolio, I’m left thinking that by ignoring it, I’m doing myself and our portfolio a huge disservice by ignoring the entire asset class and the accompanying risks; it’s finally time to add it.

However, I’m sure I’ll be met with some resistance from readers on adding the real estate to our portfolio. Here are some of the most prominent arguments (and the two that I’ve struggled with myself):

Illiquid assets. Since all of the real estate is illiquid (especially compared to stocks), it’s hard to rebalance like you can with stocks. However, just because it’s illiquid and carries a different risk doesn’t mean we should ignore the investment all together.

You need a place to live. While it might make sense to include the true rentals and the second home with vacation rental income, many argue you should exclude your primary home because you need a place to live. However, if you consider that you can rent out your home to earn income, and consider your housing requirements as personal spending, you can derive a value of “implicit rent” on your primary home by “renting from yourself”. You can then separate the real estate investment from your need for housing. I can demonstrate this point with our own house, our true cost of needing a place to live (if I’m being totally honest) is actually less than the amount we pay to rent our current house.

Accounting for the Mortgages with Negative Bonds

Once I convinced myself I wanted to add the real estate, I began researching ways to account for the mortgage. Do you include only the net asset value (fair market value – mortgage)? Or include the entire fair market value since that is the value subject to market fluctuations?

The solution is negative bonds. After using the entire value of the real estate as an asset, use the value of the mortgage as a negative bond. Essentially, a fixed rate mortgage acts like a bond with fixed payments. Of course the exception is that you are the one issuing the bond instead of buying it, which makes it a negative holding.

What Real Estate and Negative Bonds Do to Your Portfolio

Let’s put it into numbers to wrap our brains around it. Here’s an example of the real estate and mortgage as a negative bond on a hypothetical $500,000 portfolio:

Stocks: $350,000
Bonds: $150,000
Allocation: 70/30 stock/bond

However, the person also owns a $200,000 home with a $150,000 mortgage; allocate the mortgage as a negative bond of $150,000 and your actual portfolio is 100% stocks, and 0% bonds:

Stocks: $350,000
Bonds: ($150,000 – $150,000) = $0
Allocation: 100/0 stock/bond

Result: You are now actually 100% invested in stocks.

What about if your mortgage is larger than your bond holding? Consider the example above with a $500,000 home and a $400,000 mortgage, now your portfolio looks like this:

Stocks: $350,000
Bonds: ($150,000 – $400,000) = -$250,000

Result: You now have a negative fixed income holding, and are more than 100% invested in stocks.

Obviously, including these calculations takes your portfolio to a whole new level, but one can argue it’s a more appropriate assessment of what you are actually doing with your money.

Where I’m At

I’d love to tell you that I have this all figured out, but I don’t yet. Here are some of my obstacles, that I’d love to get your input on:

We are personally liable for the rental mortgages. Even though our rental properties are in a partnership at a 50% ownership, we are personally liable for 100% of the commercial mortgages, so there is an extra component of risk to sort through. It needs to be included, but how do I account for the mismatch in liability?

Other debt factors. If I include the bank mortgages, how do I handle the fact that I used credit cards instead of a traditional mortgage on the cottage? With the use of credit cards, student loans, and other unique loan sources, many of our assets are not tied to the typical collateral, which appears to be skewing some of my calculations.

How do tax benefits impact results? There is a tax benefit of the deductible mortgage interest that isn’t factored into the negative bond. Do I need to account for this to make the asset allocation valid? I would argue yes.

How do ARMs factor in? One of the reasons for valuing a mortgage as a negative bond is because of the similarity to bonds, but since I have an adjustable rate mortgage, it’s not going to behave in the same way a fixed rate mortgage behaves like a bond; and it loses an inflation hedge that a fixed rate provides. Is an ARM now a short term negative bond?

It’s not maintainable. Even if you can argue for inclusion of real estate and mortgages in a portfolio, you cannot continually add to a mortgage, which means the asset allocation will continually move. This isn’t necessarily a drawback, but it is something to be aware of.

Action Plan

So here’s what I’m planning to do to our portfolio, although it’s turning out to be a bigger project than I envisioned (I know this because I’ve already started working on it and ran into the obstacles above in my calculations):

Real estate fair market values: Adding as assets to the portfolio in a separate asset class.
Mortgages: Subtracting as a negative bond holding from bond and phantom bond allocations.

Do you include real estate and mortgages in your portfolio? What did it do to your portfolio?

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© My Dollar Plan

In your early 20’s, you never know when you will need thousands of dollars for a down payment on a house/car or for an engagement ring. Don’t be over zealous about going full throttle in stocks outside of your retirement accounts. Lesson learned here.

Learning About the Stock Market

I was the opposite of the typical young professional that puts off investing until they’re in their 40’s. I learned about the stock market through my maternal grandfather. Sitting in his living room in the late 1980’s watching CNBC on a July afternoon is what I remember. We would wait for his stocks to come across the digital ticker, John Manville and IBM to name a few. It was a good time. I figured that I was getting a good education.

My grandfather was a self made guy. He was born in 1915 and only obtained a third grade education. He had to quit public school to help support his family. A mason by trade, he made his money developing land into single family housing communities in NJ during the early 1960’s. He would make a profit of $2,000 per house on a fifteen thousand dollar home and in most cases held the note for the new homeowner. In the 1970’s he bought land and oversaw the building of a 314 unit apartment complex with his brother/partner. He put all that he had earned into the project and the income served as an annuity during his retirement years.

Those days when I would watch the CNBC with my grandfather I didn’t realize that the money he had invested in stocks was only a very small portion of his money (play money if you will). The bulk of his net worth was in real estate and the next highest percentage was in tax free municipal bonds. He was mortgage free, owned his car, supported his young family years ago, retired, and had an income that anyone would appreciate. He was in the last quarter of his life and didn’t have to worry about selling stocks in order to buy a car or a house.

My Experience Buying Stocks

When I turned 21 and got my first job out of college, I was contributing to a 401K (mostly invested in stocks) but at the same time I would put a large percentage of my discretionary dollars into the stock market in an individual brokerage account. At the time there were no ETFs and the technology sector was running wild. I majored in finance and figured I had this stock market thing licked. I bought my fair share or Warren Buffett favorites, Coke, Gillette, and even the Berkshire Class B shares, but that was boring. I sold out of them after a few years and modest returns.

During this time I had been listening to my friends as they would follow their tech stocks. Those stocks would jump a few points at least one day per week. Technology was the thing to be in, buzzwords like B2B was all the rage. I’ll never forget stocks like Etoys and CMGI. Watching all this excitement and profit left me feeling in the dark, so I decided to buy some Intel, Etoys, and Cisco Systems. Needless to say, my market timing stunk.

Being Forced to Sell

As I needed money to buy a car and purchase a first home, I had to sell stocks at a loss. I was putting way too much money into retirement (to reap those exciting returns), and cutting myself short as far as budgeting.

All in all, my holding period in my individual account was less than ten years. I had no business being in the stock market for that short duration. I was selling at the wrong times. I watched my portfolio swell tremendously during the late 90’s to see it come crashing at the end of the decade after the dot com bubble. I never had the money invested long enough thereafter to see it regain.

Then there were the 10 years in the stock market that produced no returns (1998-2008). I have been investing since 1996 (the year I graduated). I needed to be out of the market five years ago to have had any kind of positive returns (Caveat: given that my returns mimicked the market’s). That didn’t happen. Ten years is a long time to see no returns. There is nothing wrong gaining a few percent per year in laddered CD’s.

Long Term Investing in the Stock Market

The stock market is truly for your long term money. You need to back that money out slowly over time into something more stable. Investment advisors are correct when they tell you that you shouldn’t be in the market unless you don’t need that money for five years (I say more like ten years.) I wasn’t wise enough to know what was coming down the pike in my life. I wish I had someone tell me more about being cautious financially and what life events were to face me.

Joe’s story is a great reminder, not only for new graduates, but for everyone who has forgotten about market volatility during recent years.

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As a benchmark, I always begin my comparison with Scottrade, an account which I’ve had for years, and the place where I regularly open accounts for young family members.

Comparing Total Costs of Discount Brokers

Obviously, cheap trading fees are a big consideration, as are account fees, when evaluating the total cost of a broker. I also look at IRA fees, minimum balance requirements, ETF and mutual fund fees. And of course, any current promotional offers!

When opening a new account, it’s often hard to find all of these fees in one place since each broker prominently markets their best selling point. Compiling all of the fees and account minimums for each discount broker makes it much easier to compare discount brokers across the board.

Online Discount Broker Comparison

Here is an overall cost comparison of the best online discount brokers, ranked according to readers’ favorite discount brokers:

To read more details about each discount broker including highlights, you can see the full review for each broker.

I’m currently working on moving around some of our money, invested in ETFs, at discount brokers to take advantage of the lowest total cost for our portfolio.

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Admittedly when I sat down to talk about this with Paul, I knew hardly anything about them, except that they could bring in 16% interest (a far cry from the 0.02%-2.5% savings accounts are earning now), and they are issued because of homeowners that have not paid their property taxes. Paul was intrigued as well, and we decided to research this investing option. Below is what we learned.

Tax Deed Vs. Tax Lien States

People own property, and become delinquent on their property taxes. State and local governments depend upon these taxes to fund programs, and so they have come up with ways to satisfy this budget leak and collect on their taxes.

About half of states are Tax Deed states, and the other half are Tax Lien States, which refer to the method the government uses to collect delinquent taxes. In Tax Deed states governments actually sell the deed to the property at auction to investors in order to recoup their costs. In a Tax Lien state, the government sells a Tax Lien Certificate, and pays the investor interest until the tax lien certificate is redeemed. Of course there are a few hybrid states, such as Texas and Georgia that sell the property at a tax deed sale, yet allow the owner a redemption period to pay off the lien and reclaim the property. And New York, Florida, and Ohio have both tax liens and tax deed sales.

What a Tax Lien Certificate Is

According to Wikipedia, a Tax Lien is a lien imposed by law upon a property to secure the payment of taxes. While a tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes (generally referred to as an IRS lien), for this article we are concerned with just the real estate property taxes.

When a property owner becomes delinquent on his/her taxes, a tax lien certificate is issued by state governments in the amount of the taxes due, any interest due, plus any additional costs, and is sold to investors in order for the government to recoup its costs. As an owner of the tax lien certificate, you own a note on the property for a specified redemption period, and earn interest for each month the note remains outstanding. At the end of the redemption period if the taxes are not paid to the investor, then the investor has the right to initiate a tax lien sale and tax lien foreclosure proceedings.

How to Purchase a Tax Lien Certificate

In tax lien states, the delinquent taxes, accrued interest, and costs associated with the sale is put into a lien certificate and sold at public auction to investors. Auctions can be either in person, or over the internet, such as on eBay. Actual procedures vary from state to state, and may be conducted at a courthouse, or a private law firm. It is best to research online for your state and county to find out how to conduct a lien search, or if you want to speak with someone in person, call your county tax office. Also, be aware that payment is often necessary at the auction, in cash, or within two days. Check out this article on some tips for the auction process.

How Long is the Investment Period

Redemption periods, or the time period the owner has to pay their taxes, can be from 120 days to 3 years, depending upon which state you purchase them from and if the lien results in a tax foreclosure. Each tax lien certificate has a redemption period that the investor must wait before he/she can contact the homeowners.

How Much Can You Earn

tax lien certificates have a fixed rate of return, which could be anywhere between 16%-50%, again depending upon which state you purchase them from.

There are a couple of scenarios that would equal different payout amounts to you. Let’s say the property owner pays the government the outstanding taxes due before the certificate reaches maturity (and before the redemption period is up). When this occurs, then the government will send you your initial investment along with all outstanding interest due.

If the owner does not pay his/her tax obligation, then the government will give you the deed to the property. That’s right; you will have purchased a home for a ridiculously low cost. In some cases you will have to initiate foreclosure proceedings (once again, check with the state that you are purchasing them from), but either way you will own this property.

Risks Involved

Purchasing a tax lien certificate is secured by the real estate property, which means that there are two major risks involved that, with a bit of research, can be mitigated. First off, research the property’s title and make sure it is free and clear (other than the property taxes owed on it). This will ensure that if the property is sold to recoup the costs, you are first in line to receive the proceeds.

Secondly, make sure the owners are not in bankruptcy. If so, then you could fall third to the IRS and creditors before you see your money from your certificate, or from acquiring the deed to the property.

Finally, please be aware that tax lien certificates are not a liquid investment; your money is tied up until the property owner pays up, or you get the deed to the property and sell it.

Have you ever bought a tax lien certificate?

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© My Dollar Plan

Still, my earning potential or loss during the recession was chump change compared to the earning potential or loss of a billionaire. And since many personal finance gurus like to listen to what billionaires have to say when it comes to the stock market (after all, they are doing something right), I thought it would be interesting to see where the world’s top billionaires have landed.

All numbers below are based off of the annual World Billionaire list provided by Forbes.

Bill Gates (Microsoft)

• 2007 Net worth: $56 billion
• 2010 Net worth: $53 billion
• Change: -$3 billion

Warren Buffett (Major Investor)

• 2007 Net worth: $52 billion
• 2010 Net worth: $47 billion
• Change: -$5 billion

Carlos Slim Helu (Mexican Telecom)

• 2007 Net worth: $49 billion
• 2010 Net worth: $53.5 billion
• Change: +$4.5 billion

Ingvar Kamprad (Founder of Ikea)

• 2007 Net worth: $33 billion
•  2010 Net worth: $23 billion
• Change: -$10 billion

Lakshmi Mittal (Arcelor Mittal)

• 2007 Net worth: $32 billion
• 2010 Net worth: $28.7 billion
• Change: -$3.3 billion

Are you surprised by the results? I was…at least at first. It appears that Carlos Slim Helu is the only billionaire on this list that came out on top from the recession.

However, after looking into this some more, I found that many of these billionaires had huge losses during the crash of the stock market, and so actually they have bounced back quite well.

For example, in November of 2009, Lakshmi Mittal was only worth $19.3 billion (a loss of $12.7 billion from the crash), and less than one year later he was worth $28.7 billion. That is a $9.4 billion bounce-back!

Here are a few more examples: Warren Buffet lost $16.5 billion during the market crash, and Bill Gates lost $12.3 billion.

Has your portfolio bounced back? Did you come out ahead of where you were before the recession, or has your 401(k) not recovered?

Other Recession Articles You May Enjoy

• 5 Effects of the Recession on American’s Personal Finances: How Long Will They Last?
• 5 Ways the Recession has Changed Consumerism in America

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© My Dollar Plan

This is great news for all the investors at Vanguard, since the admiral shares have a lower expense ratio, which means you’ll keep more of your money in your own pocket.

Lower Minimums for Vanguard Admiral Funds

Vanguard lowered the minimum per fund for the admiral funds from $100,000 to $10,000 last week. The new minimum is for most of the index funds; actively managed admiral funds will now have a $50,000 minimum.

Vanguard Admiral Funds

Here are some of my favorite Vanguard index funds that we hold in our portfolio with their lower expense ratio admiral fund:

• Total Stock Market Admiral Index: 0.07%
• Vanguard 500 Admiral Index: 0.07%
• Emerging Markets Admiral Index: 0.27%
• REIT Index Admiral Shares: 0.13%
• Vanguard Total International Admiral Index (new): 0.20%

In addition, the Vanguard Total Bond Admiral Index, which we use to hold before we moved to 100 % in stocks is 0.12%. There is currently no small cap value admiral fund.

In addition, some other popular Vanguard funds (that I don’t use) that will lower their minimums to $50,000:

• Vanguard Admiral Wellington Fund: 0.23%
• Vanguard Admiral Windsor Fund: 0.20%

How to Qualify for Vanguard Admiral Shares

Unlike voyager and flagship status, which are determined on total account balances, qualifying for admiral shares is based on a per fund balance. Once you meet the $10,000 minimum, you’ll qualify.

Here’s where it might make some sense to look at your entire portfolio across your various accounts to reach the admiral fund minimums. If you have $5,000 in both the total stock market index and total bond index in both your IRA and your Roth IRA, you may want to reallocate to hold $10,000 of one admiral fund in each account, while still maintaining the same total overall asset allocation.

How to Convert to Vanguard Admiral Funds

With the new requirements, Vanguard will automatically convert your qualifying funds soon.

However, you can login to your account and select to manually convert to admiral shares Vanguard. I converted a few of our smaller funds last week with no problem.

Converting from the investor shares to the admiral shares is a tax free change.

Action Plan

With the changes, it may shift the index fund or etf argument more towards index funds for investors. I may be moving some of my ETFs at Schwab back to Vanguard!

I’m also considering switching some of the Vanguard ETFs in a Roth IRA for my younger family members.

I think this is a fantastic move for Vanguard investors… just one more reason I’m pleased that we moved our fidelity solo 401k to Vanguard!

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What makes a Bubble

You’ve probably heard the terms “tech bubble” and “housing bubble” tossed about. But do you know what really makes a bubble? Bubbles form when an investment enjoys outsized returns. As a result, investors flock to the investment, driving prices higher. The higher prices attract even more investors, and the price keeps going up. But at some point, the price exceeds a reasonable amount for the return that the investment provides. Investors realize that their investment wasn’t worth it, and start trying to unload the product. As a result, prices fall – often quickly – and the bubble bursts. Those who haven’t managed to unload the investment miss out on the gains they could have had if they had sold sooner. And when bubbles burst quickly, as they often do, investors usually lose some or all of their initial investment as well.

Why Munis could be Next

There are two ways to make money on municipal bonds: by receiving interest payments at regular intervals and then receiving your principal back at maturity, or by selling the bonds for a profit before maturity. With unemployment high and consumer spending still struggling in the wake of the recession, states and municipalities are dealing with lower tax revenue. A few bond issuers have failed to pay bondholders when the bonds mature. Investors who hold munis to maturity lose their initial investment when this happens.
The more common way that munis (or really all bonds) lead to a loss for investors is when interest rates and inflation rise, thus pushing bond prices down. When this happens, it is nearly impossible for investors to sell their bonds at a profit.

Municipal bond demand has remained high, even as returns have begun to stabilize. If the weak economic recovery continues, there might be more defaults on municipal bonds. If the economy stabilizes more rapidly, inflation and interest rates will increase. In either case, municipal bond prices will suffer – and with them, your investment returns could take a tumble.

What you can Do

Just like stocks, go with what you know and diversify. The best way to purchase municipal bonds is through a municipal bond fund. This way you are exposed to bonds from a variety of municipalities, and if one goes sour you won’t lose all your money. You can trust fund managers to get in and out of short and long term bonds as the interest rate and inflation environments change. If you absolutely can’t afford to lose any part of your money or don’t understand how the investment works, keep your money in CDs or Money Market accounts instead.

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OptionsXpress is a brokerage with an all-in-one trading platform that allows you to trade bonds, mutual funds, ETFs, options, futures and stocks ALL in one convenient online trading account.

Part of their company mission is to be the “ideal broker for options traders looking to maximize their returns.” Here is a closer look at what optionsXpress offers.

optionsXpress Fees

• Stocks: $9.95/trade ($0.01/share over 1,000)
• Futures: As low as $2.99/contract
• Options: $15 for 10 Contracts; $30 for 20 Contracts
• No Hidden Fees: OptionsXpress doesn’t require a minimum balance and doesn’t charge fees for periods of inactivity, volume or quantity of activity, or standard withdrawals or deposits. Check out their No Hidden Fee Policy.

optionsXpress Additional Trading Fees

One of the features of optionsXpress is the ability to consolidate all of your trading needs in one account. The trading fees for ETFs, mutual funds, and bonds are as follows:

• ETFs: $9.95/trade
• Mutual Funds: $9.95/trade
• Bonds: $9.95/trade

optionsXpress Details

Online Trading Tools. OptionsXpress offers traders a breadth of online trading tools to help customers with their investing strategies.

Virtual Trading. Among the many tools OptionsXpress offers, one of the coolest seems to be their Virtual Trading which allows you to develop your knowledge of investments in a real online trading environment before you actually jump in.

High Ratings. Forbes, Barrons and SmartMoney have all given OptionsXpress good reviews.

optionsXpress Overall

OptionsXpress offers a great array of tools for investors. If you’re trying to teach yourself more sophisticated strategies or are a bit naive when it comes to investing, the tools on their site alone could be of great help.

Some of the information on options and futures may overwhelm investors with a simpler strategy but optionsXpress recognizes this and their interface is easy to navigate for a variety of investing vehicles.

One of the nice features is the free broker-assisted trading, phone or online assistance. Other brokers often charge a higher fee when you need to get assistance with your trade, which is a comfort to traders who might need a little hand holding at first.

optionsXpress Sign Up Offers

Account Transfers. OptionsXpress will reimburse you any account transfer fees your other broker charges you up to $100. To get your $100:

1. Complete a full account transfer of $2,000 or more.
2. Fax optionXpress at (312) 629-5256 with a statement showing your charges.
3. Get your credit deposited to your account within 30 days.

$100 Sign Up Bonus. Don’t forget the free money OptionsXpress $100 Sign Up Bonus offer. To get the $100:

1. Open and fund an OptionsXpress account with $500 by December 31, 2011.
2. Execute three trades within 12 months of opening the account.
3. $100 will be deposited into your new account within one month.

If you’ve been on the fence about opening an account, now is a great time to check them out with the sign up bonus! Madison is planning on opening an account this week to take advantage of the $100 sign up bonus, and dig deeper into the trading tools.

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Social Lending Arbitrage

Its been six months since I first introduced my Social Lending Arbitrage method to the mydollarplan community, and Madison has asked me to provide an update on where I stand with my method.

To summarize the idea, this method basically plays an arbitrage game similar to the no-interest credit card arbitrage popular on the site but with a slightly different twist in that I’m borrowing money at a lower interest rate and lending it out at a higher interest rate — and pocketing the difference.

Social Lending Arbitrage Numbers

I borrowed $10k from lenders at the Lending Club website at an interest rate of 7.78% and turned around and invested that capital (minus some service fees taken out by Lending Club as a part of the loan) to other borrowers with a higher risk profile than myself. It is a method wherein I profit off of varying appetites of risk. I have a higher risk appetite with this money than other lenders and as such, I make a return off borrowed money (Note that I have enough cash held in reserve from other sources that I am able to cover my loan should the social arbitrage world end tomorrow, so my sense of risk is appropriately higher than someone who does not have that).

Metrics as follows:

• Amount Borrowed: $10,000
• Interest Rate: 7.78% (Or $1,245 over 3 years)
• Total Fees: 1.25% (note that this has since gone up to 2.25%) (Or $125)
• Total Cost of Capital (3 yrs): $1,370 (13.70%)

Loans:

• Amount Loaned: $9,875 ($10,000 minus $125)
• Loans filled ($25 per loan): 395
• Est. Default Rate: 2.5% ($247 in total)
• Net Invested: $9,628
• Average Annualized Return: 14.69%
• Service Charge: 1%
• Net Return: 13.69%

Total Return of Invested Capital (3 yrs): $2,166 (22.5%)

Arbitrage Gain (3 yrs): $797

Social Lending Details

I personally choose all 395 loans, which I feel was incredibly time-consuming, but also ended up being to my benefit, as the default rate is lower than normal (outlined in more detail below). I have not decided whether I would go that route should I do this again in the future, since it was more time-consuming than I was ok with.

The beauty of this system is that I have isolated all transactions related to this set up to one bank account which is fully automated — I don’t touch it month over month. My only real work after initial set up was to determine whether my default rate is staying below my forecasted rate of 2.5% (which I update quarterly).

I am 1 year into this plan and thus far, of the 395 loans I have funded, I have had 2 default (one with 3 payments made in total, the other with 6), which translates into a 1.50% default rate (assuming I will have another 2 default per year through the remaining 2 years). This equates into more of a return than I had originally forecasted. Happy day!

While it is next to impossible to determine which loans could potentially default in the future, I was highly surprised that of the sheer number of loans I have funded, 10 have had any late payments, and of those, only 2 have defaulted. My thought behind this is that barring unforeseen financial hardships that could occur to my borrowers, I would expect those that have been paying so far to continue to do so through the end of the loan term.

Selling Riskier Loans

I have kept a close eye on the credit scores on all my loans with a lower than B rating (the riskier loans in my portfolio) to see if they are getting “riskier” than they were when I originally funded the loan. Should any fall substantially far below their original rating (something at this point I consider subjective from both a rating perspective as well as my own viewpoint), I plan on selling the debt to someone with a higher risk appetite than myself.

How to do so? Luckily for me (and others), Lending Club and Prosper have provided their members the ability to sell the debt they own to other members on a trading website Folio Investing. This adds a degree of flexibility to lenders in case they want to pull out on one or many loans. It effectively provides me the ability to increase my liquidity should I need it (although there is the potential I would lose my return or even my principal should I have to firesale the debt). In my mind, the more options I have for worst-case scenarios, the better I can exit this position and minimize my losses should the worst happen.

Social Lending Projections

Using the updated default rate, my new forecast calls for me to earn approximately $835 over 3 years. This assumes I do not reinvest the return I make on new loans (which at this point I am not doing), so theoretically this return could be higher than that should I choose to do that (which I am considering, but have not had the time to properly research new loans). The idea that by reinvesting, I compound my return makes this plan all the more enticing! Not only am I receiving free money, I begin to see an even greater return as the free-money snowball gets larger over time.

I must reiterate that this investing method is definitely not for everyone. Every investment has a level of risk and while I feel this is easy enough for myself to earn a small return, others may not like the inherent risks of investing in a new vehicle such as social lending is. This is a relatively new type of investment and while the intent behind the system is very noble, some may consider the relative ease of borrowers’ ability to game the system to be riskier than worthwhile. Others may consider the return in actual dollars to be too small for some people to consider – this may be more work than worthwhile. Again, its a personal decision.

For myself, free money is free money, and is completely passive income, which in my mind makes the process worthwhile. What kind of free money returns do you have?

Lending Club is giving a sign up bonus to try out social lending for free. If you haven’t taken advantage of it yet, you can try it out at: Lending Club $25 Sign Up Bonus.

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Good thing I didn’t toss the papers! The mutual funds were involved in market-timing and late trading in what was called the 2003 mutual fund scandal. I remember the scandal vaguely in the news, but at the time I didn’t realize we were affected by it since we were busy with our wedding at the time.

Mutual Fund Settlement

The court papers I received directed me to the mutual fund settlement website where it lists all of the mutual funds involved.

They mutual funds involved are:

• Alger
• AllianceBernstein
• Allianz
• Bank of America/Nations
• Columbia
• Federated
• Invesco
• Janus
• MFS
• One Group/Bank One
• Pilgrim Baxter (PBHG)
• Putnam
• RS
• Schwab/Excelsior
• Deutschebank/Scudder
• Strong

How to Get Your Mutual Fund Settlement Money

Here’s what you need to know about submitting a claim:

Mutual Fund Settlement Period: The time periods are different for each fund, but go as far back as October 1, 1998 through September 30, 2003.

Deadline to submit your claim: December 8, 2010.

Mutual Fund Settlement Process: If you got a notice in the mail, you can go to the website listed and file your claim form with the claimant number. If you didn’t get a form in the mail, you can still submit a claim directly on the website.

You will need to identify how many shares you held of each mutual fund at the end of each of the years involved. This is where I’m relieved that I have more than a decade of transactions in Microsoft Money. I can put together a report very quickly before I begin the tedious process of digging out all the statements.

Our Mutual Fund Settlements

Late last year we received a check from a Invesco mutual fund settlement, but I didn’t think much of it. Now that I’m looking into it, I realize we have a lot of affected mutual funds. Many of them are because our home state 529 plan was run by Strong.

But some of the mutual fund settlement times go back to when I was still in college. I was just learning about index fund investing, so I had money in many actively traded mutual funds included a handful on the list!

I guess I know what I will be working on for the next few weeks…

Time to check your investment histories! Are you involved in any of the mutual fund settlements?

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